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What the $12.6B Prologis/Liberty Deal Means for the Industrial Sector

While industrial REITs have an appetite for large acquisitions, there are few portfolios up for sale.

The pending $12.6 billion purchase of industrial and office REIT Liberty Property Trust by industrial REIT Prologis Inc. represents the biggest REIT M&A deal announced so far in 2019. But does it represent a harbinger of further M&As in the industrial REIT sector?

Experts say it’s unlikely that the acquisition signals a stepped-up pace of consolidation among industrial
REITs. This sentiment stems from the relative lack of sizable top quality industrial portfolios that haven’t already changed hands, according to Eric Frankel, senior industrial REIT analyst at Green Street Advisors Inc., a Newport Beach, Calif.-based provider of real estate research and advisory services.

“There is no doubt that all industrial REITs are looking to grow, but they’re fairly selective in regard to the markets they want to invest in,” says Frankel, noting that interest in industrial properties among institutional investors “is as fervent as ever.”

The two obvious M&A candidates among publicly-traded industrial players are already spoken for, says REIT analyst John Guinee, managing director of St. Louis-based investment bank Stifel Nicolaus & Co. San Francisco-based Prologis is buying one of those candidates, Liberty Property Trust, and purchased the other candidate, Denver-based DCT Industrial Trust Inc., in August for $8.5 billion.

Mergers like the combo of Prologis and Liberty Property Trust “happen when the acquirer is trading at 20 percent plus above net asset value, while the acquired entity is trading at a 20 percent discount to net asset value,” Guinee says.

For a variety of reasons, the remaining publicly-traded industrial REITs—including Duke Realty Corp., EastGroup Properties Inc., First Industrial Realty Trust Inc., Lexington Realty Trust, Rexford Industrial Realty Inc. and Terreno Realty Corp.—aren’t poised to be acquired, he noted.

However, Scott Robinson, director of the REIT Center at New York University’s Schack Institute of Real Estate, does foresee a ramp-up in privately-held industrial portfolios entering the public markets through reverse mergers or IPOs.

Of course, all of this comes against the backdrop of New York City-based investment behemoth Blackstone Group Inc. scooping up millions of square feet of industrial space. In September, Blackstone wrapped up its $18.7 billion buyout of the U.S. industrial assets of Singapore-based GLP Pte. The same month, Blackstone said it would buy the U.S. industrial assets of Dallas-based Colony Capital Inc. for $5.9 billion.

In the face of heightened competition from Blackstone, Prologis is striving to fortify its status as the country’s industrial juggernaut. In the second quarter, the entire U.S. industrial market added nearly 65 million sq. ft. of space, pushing total inventory past 13.2 billion sq. ft., according to commercial real estate services company JLL.

As outlined in a news release announcing their marriage, the Liberty Property Trust deal gives Prologis:

  • A 107 million-sq.-ft. industrial portfolio in 18 U.S. markets.
  • 5.1 million sq. ft. worth of industrial projects under development.
  • Close to 1,700 acres that can support 19.7 million sq. ft. of industrial development.
  • A 4 million-sq.-ft. industrial portfolio in the United Kingdom.

Prologis plans to sell about $2.8 billion in non-core industrial properties owned by Liberty Property Trust, along with a $700 million office portfolio. In all, the targeted dispositions account for roughly one-fourth of Liberty Property Trust’s holdings.

“This type of acquisition, akin to trolling through a lost-and-found bin, is smart strategy and, in many ways, reflects the current highly competitive acquisition climate,” Robinson says.

Once the deal closes and Prologis spins off non-core assets, it will control about 73 million sq. ft. of industrial assets previously under the Liberty Property Trust umbrella, according to commercial real estate services company CBRE. That will further solidify Prologis’ status as the world’s No. 1 owner of industrial properties, with 532 million sq. ft. in the U.S. and 828 million sq. ft. worldwide.

Aside from snapping up Liberty Property Trust and DCT, Prologis is in the midst of buying Industrial Property Trust Inc.’s wholly-owned properties for nearly $4 billion. Industrial Property Trust’s 37.5 million-sq.-ft. operating portfolio comprises 238 properties in the United States. Denver-based Industrial Property Trust is a privately-held REIT.

Prologis’ proposed acquisition of Liberty Property Trust brings the value of equity REIT M&A deals undertaken this year to nearly $23.9 billion, according to industry group Nareit. It would be the largest equity REIT M&A transaction since Brookfield Asset Management Inc.’s nearly $27.2 billion purchase of retail REIT GGP Inc. in August 2018, Nareit data shows. Thus far, the Liberty Property Trust and Industrial Property Trust acquisitions are the two biggest equity REIT M&A transactions in 2019.

For Prologis, the success of the Liberty Property Trust acquisition ultimately hinges on how efficiently it can unload the non-core assets and how the Pennsylvania industrial market performs, says Frankel. Liberty Property Trust owns dozens of industrial properties throughout the Keystone State.

Because Liberty Property Trust isn’t a pure-play industrial operator, it’ll take “a little elbow grease” for Prologis to sell the non-core properties, Robinson notes.

“Prologis continues to make the bet that scale matters, and that they can operate large portfolios in close proximity to their existing properties more efficiently, with lower overall operating costs, and more effectively, in terms of potentially higher rents for better service,” notes Frankel.

During Prologis’ Oct. 15 earnings call, conducted 12 days before the Liberty Property Trust acquisition was announced, Chairman and CEO Hamid Moghadam said the REIT remains open to more industrial deals.

“People know our phone number, and they know … what business we’re in,” Moghadam told Wall Street analysts. “So, we absolutely, positively have never thought of a material transaction that we haven’t seen. So, you can assume we look at everything.”

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